Allergan: Take That Valeant Pharmaceuticals!

By Ben Levisohn

Shares of Allergan (AGN) has jumped today after the maker of Botox and other drugs beat earnings forecasts and said it would restructure the company as it attempts to fend off a hostile takeover from Valeant Pharmaceuticals (VRX).

Blooomberg

Allergan reported a profit of $1.51 a share, topping analyst forecasts for $1.44, on revenue of $1.85 billion, beating the Street consensus for $1.72 billion. Allergan also said it would fire 1,500 workers. As for Valeant Pharmaceuticals, it complained to the SEC that Allergan was making false statements about its businesses in an effort to drive down its stock price, while a large Allergan shareholder dumped it shares.

BMO Capital Markets’ David Maris thinks Allergan has “unlocked approximately $30 per share in value.” He explains:

With the estimate $475 million of annual savings, Allergan now expects to reach 2015 EPS $8.20-8.40 vs. consensus $6.87 and 2016 EPS $10.00 vs. consensus $8.14. We believe that if the market applied even just a market multiple to these costs cuts, Allergan has unlocked approximately $30 per share in value. [Forward market multiple of 16.4 multiplied to the approximately $1.80 incremental EPS equals $29.59].

We believe these cost cuts accomplish several things beyond the additional EPS, including; 1) provides a floor valuation well above the current price. Given Allergan’s historical earnings multiple range, we do not think it is unreasonable for investors to think that Allergan shares will approach 25x 2016 EPS, or $250, as we approach 2016; 2) makes Valeant’s cost savings harder to achieve as Allergan is delivering the cost savings to Allergan shareholders, not a hostile bidder. In turn, this makes a hostile bidder’s cost extraction model and goals much more difficult to achieve. In other words, for an Allergan shareholder, $475 million of Allergan cost savings before the Valeant deal is equal to approximately $1.1 billion of Valeant cost savings to Allergan shareholders after the deal since Allergan shareholders would represent only 44% of the combined AGN-VRX; and 3) Provides clear rationale for the board of Allergan to continue to reject the offer and deem it insufficient given the historical multiple and expected earnings…

As for news today that Valeant has complained to regulators regarding alleged statements about parts of Valeant’s business, we believe it will have no impact on Allergan’s defense as these types of complaints often occur from hostile bidders.

Shares of Allergan have gained 2.6% to $171.678 at 2:19 p.m., while Valeant Pharmaceuticals has advanced 3.6% to $126.35.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.